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By John Helmer, Moscow

There’s not much of a market in used testicles.

When Jonathan Oppenheimer (right image) was obliged to sell his last week, ending the Oppenheimer family’s century-old diamond business, those closest to the affair in Johannesburg sniffed that Jonathan Oppenheimer’s wife Jennifer Ward Oppenheimer had so gravely damaged the value of the De Beers brand, her father-in-law, Nicholas Oppenheimer, was obliged to accept a discount buyout from Anglo American Corporation.

The Oppenheimers walk away with $5.1 billion from Anglo American, run by Cynthia Carroll, which will control about 85% of the company. The Government of Botswana currently holds the remaining 15% in De Beers, but if it can afford to pay, it has the option to buy up to another 10%.

Anglo American has been waiting for the right moment when the market value of the Oppenheimer stake was not so great, and the desperation of the family to sell coincided. The terms of the announcement, issued on Friday by Anglo American, report Nicky as saying: “after careful and deliberate consideration of the offer, and what is in the best interests of the family, we unanimously agreed to accept Anglo American’s offer. Anglo American is the natural home for our stake.” He told the Financial Times a little more: “We are an African family and in Africa you only deal when you have got a consensus…and we came to the unanimous decision that from the family perspective this was the right way forward.”

The point is that the new generation, Jonathan, his wife, and their children are by no stretch of the imagination an African family, and don’t wish to be. Jonathan describes his wife, an American, as “my best and closest friend, as well as my wife. She has a rigour and discipline about thinking things through that is exceptional. Because she is my wife, she has my best interests at heart and she gives me some incredible counsel.”

That counsel destroyed the last capability De Beers had to operate a potent international mining company. When Jonathan had succeeded at that, the company set about destroying the mining management – those especially well-known in Russia and respected individually, despite the fierce commercial conflicts that materialized between De Beers and the State Committee for Precious Metals and Gemstones (Komdragmet); Yevgeny Bychkov’s business interests; Alrosa; a succession of Sakha potentates; and Lev Leviev. The last of the De Beers men (with balls) in Russia were Gary Ralfe, Richard Wake-Walker, Raymond Clark, and Nigel Kieser. After he had driven them out of the company, Jonathan abandoned the last Russian venture De Beers had, the Verkhotina project in Arkhangelsk region.

The last word on that and other mining mistakes falls to that still fully testicular, I mean testy veteran of De Beers, Charles Wyndham. “I must say I can hardly feel sorry for someone who has managed to sell his stake in a company for $5.1 billion in cash, and it actually makes me wonder who felt under more pressure. De Beers was, I recall, valued at $19 billion when it was privatised in 2001, so valuing the Oppenheimers’ 40% stake in the company at $5.1 billion or $12.75 billion for the 100% is about as good an epitaph on Oppenheimer at the helm as any other. Indeed, the numbers are actually worse than would first appear as everyone, well certainly myself included, would argue that De Beers was heavily undervalued at the time of the privatisation deal.”

What remains now of the Oppenheimers in South Africa is their philanthropic foundation, Brenthurst. That is run by Greg Mills, whose special relationships have been with the Turkish government and German corporations, and who as a paid guest of a Russian areospace company, was caught taking photographs inside a Russian aviation complex near Moscow. He has made his affiliation much clearer since then, taking jobs he describes as “special advisory” ones to the NATO command in Afghanistan. Whatever he did there resulted in the award of “campaign medals” by the US and UK governments, according to the published Mills resume. Mills has been an eccentric choice to direct the Oppenheimer philanthropy in South Africa. Now that there are no Oppenheimer assets at risk in the country, Mills will perhaps go back to the wars he has been helping to lose for the western alliance.

Which brings us on to the Russian significance of the Oppenheimer exit. By accepting $5.1 billion to jump ship, the Oppenheimers have agreed to a valuation of 100% of De Beers at $12.75 billion. That in turn represents a multiple of about 9 of De Beers’s earnings before interest, tax and depreciation (Ebitda) for 2010. Sector analysts claim that for next year’s projected Ebitda, the multiple works out at less than 6. This is small by comparison with the multiples accepted in the international markets for diamond-mining peers.

If applied to Alrosa, now the leading diamond miner in the world in terms of carat volume with Ebitda last year of about $1.3 billion, Alrosa should be valued at almost $12 billion. Apply the same multiple to Alrosa’s fast-rising Ebitda for this year, and the valuation jumps to $18 billion. Strike Alrosa earnings of say $2 billion in 2012 (assumes no growth on this year) with the lower multiple, and you are still in the $11 billion to $12 billion value range.

Substitute the Kremlin for Mr & Mrs Jonathan Oppenheimer; insert Russian state bank lending guarantees; and add diamond reserves which will be relatively lower in cost to mine in future than Anglo American is now acquiring, should support a 30% premium for Alrosa in an initial public offering (IPO) – in short, between $14 billion and $24 billion. Not bad, especially if Fyodor Andreyev (left image), Alrosa’s chief executive, can head off the rising debt load he has heretofore been promising to reduce. The new blowout stems principally from the recently announced decision by the company and VTB to exercise the buy-back option for gas assets at about $1 billion. We told that tale a year ago. In a recent report on Alrosa, Raffeisen Bank doesn’t think any better of it.

With the panache of an earlier Oppenheimer generation gone, the De Beers diamond brand is likely to give ground in the growth markets for diamond consumption, such as China and India. This too is an advantage on which Alrosa and Kristall, as well as the Leviev-branded Russian stones, will be able to capitalize.

Then there is the prospect of further consolidation of global diamond-mining, as BHP Billiton leaves the field, and offers to sell its Ekati mine in Canada and related assets. A month ago, Alrosa fuelled the buy-sale talk with a Moscow press leak, claiming it is considering a bid to buy BHP out of the diamond business. According to Kommersant, Alrosa has commissioned its principal banker, state-owned VTB, to advise on possible assets the company may purchase abroad. The leak was a sensitive one, because Andreyev has repeatedly assured the Sakha government that he regrets the excesses of investment by the company under previous CEO Sergei Vybornov in Africa and in non-diamond assets elsewhere, and will not repeat the mistaken strategy.

The press report, however, claimed that Igor Kulichik, the chief financial officer of Alrosa, has been looking to invest company funds in offshore diamond deposits and foreign exploration ventures. Kulichik, who has been head of treasury at Alrosa since 2002, then chief financial officer since 2009, rarely speaks in public. The Kommersant report claimed the investment arm of VTB, VTB Capital, has recommended to Kulichik and Andreyev that they consider buying Ekati for a price of between $1 billion and $1.5 billion, and then add diamond exploration prospects, also in Canada. If Alrosa takes Wyndham’s advice, it will do better to avoid “dogs of mines” in Canada.

Asked to clarify Alrosa’s intentions, the company spokesman Andrei Polyakov told Polished Prices.com: “I, too, have learned that [story] from Kommersant, so please ask them, not me. I don’t see what to comment on here.” Another source close to Alrosa said he had no evidence of a foreign acquisition plan, or of the VTB recommendation, but is not surprised that BHP may be divesting non-core diamond mine assets.

Sources in Moscow also claim to have heard that a sale of Ekati has been proposed by BHP to gauge market reaction and price. There are also reports that an Alrosa delegation has been to Ekati recently. The sources believe that De Beers would be the most likely bidder if BHPB is selling, but is precluded from making a direct purchase move by European Union anti-trust restrictions. In its place, Anglo American may be better positioned to make a bid.

Rio Tinto and Tiffany are also reported to be interested bidders. Rio Tinto appears now to have abandoned last year’s plan to create a joint venture with Alrosa, and will not now invest in the Verkhotina project.

There is something to be regretted, though, that Nicky Oppenheimer is withdrawing from the visible role he has played in international diamond-mining. For one thing, it will end the identification mistakes on aeroplanes and other public conveyances from which he and I have benefited and suffered over the years. For another, the haircut he has accepted from Cynthia Carroll suggests that the combination of dark hair and grey beard, for which Nicky established a vogue I’ve happily followed for years, is now out of fashion.

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